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Surplus in pension funds

26 Oct 2016

The Pension Funds Second Amendment Act, commonly called the "Surplus Act" came into place in 2001 and made some interesting changes to the Pension Funds Act. The changes introduced minimum benefits a member of a fund could qualify for and allowed for the allocation of surplus.

The Act also introduced timeframes which stipulate by when a surplus apportionment exercise has to be done. Members qualified to claim if they were on the fund or if they left their employer's service after 1 January 1980. This means that members who left their funds before this date do not qualify to claim.

In simple terms, the Surplus Act aims to ensure that former members of pension and provident funds, who did not get paid their full share of their fund benefit, could be included in a surplus distribution exercise without making the pension or provident fund insolvent.

This is because in reality, many pension and provident funds had huge amounts of surplus because not all former members had been paid their full entitlement when they exited the fund.

The common reasons for surplus to exist in pension and provident funds include:

Before the 1990s most pension and provident funds were Defined Benefit Funds ("DB Funds"). The contributions paid into a DB fund are based on a calculation that does not necessarily aim to align the amount of contributions with the benefit that will be paid when the member exits.

Most fund rules applied vesting scales which meant that a member could not receive their full benefit when they left the fund unless they had worked for the employer and contributed to the fund for a stipulated number of years.

In cases where a person left their employment and did not claim their fund benefit, the benefit would be forfeited by the member after a certain period (normally after 3 years from the date the member exited the fund).

Process of surplus apportionment

As a result of the surplus in funds, funds are required to follow a process as guided by the Act, to go through an apportionment exercise so that the monies owed can be allocated to their rightful beneficiaries.

All funds had to do a surplus apportionment exercise by drawing up a scheme that show, amongst other things, the amount of surplus available in the fund, how that amount will be split between the employer and the members, and which of the former members will have a portion of the surplus paid to them.

The surplus scheme had to be submitted to the Registrar of Pension Funds at the Financial Services Board for the Registrar's approval and once approved, the funds could then proceed to distribute the money.

How will you know if you qualified for a surplus apportionment?

Funds are required to communicate to members, using appropriate channels, advising of a surplus apportionment exercise. The channels may include regular press.

You must have been a member of the fund when the surplus exercise is done.

If you are no longer a member of a fund, you need to have left the fund after 1 January 1980 but before the surplus apportionment date in order for you to be considered. This means that you do not qualify to be included in the surplus apportionment if you left the fund before 1 January 1980.

The fund will rely on its records or those of the employer to put together a surplus apportionment scheme. Where the fund does not have member records, members are allowed to approach the fund and submit the necessary information to be considered to receive a portion of the surplus.

Not all pension and provident funds that are currently registered have completed their surplus apportionment exercises, however, most of them have already done so and obtained approval to make payment from the Registrar of Pension Funds.

If you were a member of a pension or provident fund and believe that you qualify for a surplus benefit, you are encouraged to approach the fund or its administrator or the employer to make enquiries.